Google acquires video compression software maker On2 for $106.5 million. While the search engine company noted the importance of video online, Google declined to specify how it will use On2’s assets. The best guess is that Google will support its YouTube video-sharing site with the compression codecs, joining Apple, Adobe and Microsoft in offering video technologies. Are open-source codecs in Google’s cards?Google agreed to video compression software maker On2 Technologies for $106.5 million in stock Aug. 5.

On2’s Video software compresses video in more than 2 billion desktop computers and mobile devices and worldwide for such companies as Adobe, Skype, Nokia, Sun Microsystems, Sony and Brightcove. Such technology would be a fine fit for Google’s leading video-sharing Website YouTube, which it acquired in 2006 for $1.6 billion.

“Today video is an essential part of the Web experience, and we believe high-quality video compression technology should be a part of the Web platform,” said Sundar Pichai, vice president of product management at Google.

Google was mum about how exactly it plans to use the On2 assets, which On2 interim CEO Matt Frost said On2 will continue to improve, support and sell throughout the transition.
“Although we’re not in a position to discuss specific product plans until after the deal closes, we are committed to innovation in video quality on the Web, and we believe that On2 Technologies’ team and technology will help us further that goal,” wrote Jeremy Doig, engineering director for video, and Group Product Manager Mike Jazayeri in a blog post today.

Google will likely use the On2 technology, which promises “faster encoding, easier playback, smaller files, faster download times, reduced streaming delays and lower bandwidth costs without compromising visual quality,” to bolster YouTube. It would be Google’s first buy to fortify YouTube since the company bought video annotation software maker Omnisio in July 2008.

GigaOm’s Om Malik said the deal makes sense because most companies serious about video own their own video technologies: Apple, Adobe and Microsoft (Silverlight coming).

TechCrunch’s Robin Wauters said Google could open source On2’s VP7 and VP8 video compression codecs as alternatives to the H.264 codecs. This would make sense, given Google’s consistent approach in releasing technologies, such as its Android mobile operating system and Chrome Web browser, as open-source software.

Google said each outstanding share of On2 common stock will be converted into 60 cents’ worth of Google class A common stock, or a 57 percent premium over the 38 cent closing price of On2’s stock from Tuesday’s trading. Google expects to close the deal, subject to regulatory review, in the fourth quarter of this year.